Mutual funds that invest in US stocks have suffered huge outflows since the beginning of 2008. But during that time, there have been ebbs and flows, and a few good weeks amongst the bleeding. April was one of the good times; people actually sent money into their mutual funds. And not surprisingly, the spring rally that topped-out in April was the best rally of the year.

But Joe Sixpack wanted nothing to do with the June and July rallies, and so far, the September rally. On the SPX chart below, I have drawn boxes around the four rallies this year (click to enlarge):

The next chart is weekly flows into and out of mutual funds this year. I have added color-coordinated arrows that match with the first chart:

The black arrow points to four straight weeks of inflows during April, which matches up with the black box on the first chart. The public actually got sucked into that rally. But now look at the blue, purple, and red arrows. The Wall Street hype machine failed to bring in any new money at all – not a dime in five months.

How long will people be afraid of another Flash Crash? I don’t know, but the market will not be able to get back to normal until that time.

What happens in the mean time? My theory is that the big pension funds become the swing vote, so to speak. Could it be that their portfolio rebalancing is what has produced this range-bound market? Are they, at this very moment, planning to take profits on their stocks and rotate the proceeds into bonds? After all, you’ve got to be in TLT no later than Thursday to collect the monthly dividend.

Note: You can buy TLT on Thursday and sell it on Friday, and still get the dividend. However, the ETF will drop on Friday morning by the same amount of the dividend, so there’s no free lunch – unless TLT rallies after going ex-dividend; then you can have your cake and eat it too.

Note: The Investment Company Institute, which is the official trade organization of the mutual-fund industry, reports fund flows with a one-week lag. So, for all we know, Joe Sixpack could have sent his life savings into Fidelity last week. However, if you look at the last bar on the chart, you will see that outflows actually increased during the second week of this rally. So, the public looked at it as on opportunity to get out.

Note: I maintain weekly and monthly mutual-fund flow charts going back to May 2004 at DailyJobsUpdate.com.

After the “Flash Crash” back in May, I conducted a poll to see who thought a bear market would ensue. The market did indeed fall from that point, but not the 20% needed for an official bear market. So, congratulations to the people who voted “no bear market”.

The “A” Team:
Matt
Jim
Larry
Mitch
Randall

The “F” Team:
2thfixr
after
Bob D
Bob Smith
George
Hank
K
Phil
Rodrigo
Sam
shellysan
String

You people on The “F” Team will just have to try harder. But seriously, it was a pretty close call. According to my calculations, the drop from the April peak of 1219.80 to the July low of 1010.91 was 17.13%. And if you went short after voting for a bear-market and stayed short the whole time, you had a winning trade up until this week.

How did the market survive? My theory is that the “Flash Crash” was a financial event rather than an economic event. So, while everybody was freaking out over events in Europe, the US economy continued its feeble expansion, second-quarter profits came in strong, and stocks didn’t look too bad.

Even as the market plunged after the poll, I never changed my vote because I used my superior withholding-tax indicator to fend off the ECRI hysteria of June.

Contrary Indicator Disclaimer: Let the record show that I think the market is more likely to plunge 10% than it is to rally 10% from this point in time on September 24, 2010. Of course, when you declare victory in something like this, it’s perfectly natural to do so at the top of a rally. And by doing so, I am attempting to jinx the market so that certain long-suffering bear friends of mine can weasel out of their positions.

Remember all of the commotion about ECRI’s “infallible” Weekly Leading Index (WLI) during the summer? And how it was forecasting impending doom? Here is how it looked at the end of June (click chart to enlarge):

Scary, right? But my subscribers at DailyJobsUpdate.com knew better. Look at the lower-right corner of my indicator:

It was moving upward sharply, indicating economic improvement.

Did I mortgage my house and go all-in short after reading articles like Zero Hedge’s “ECRI Plunges At 9.8% Rate, Double Dip Recession Virtually Assured“.

Not hardly. And it’s a good thing too because the S&P 500 made its bottom for the summer just as June was ending, and the ECRI hysteria was at its peak:

Of course, the stock market doesn’t always move in the same direction as the economy, so indicators like these are of limited use in trading. Nevertheless, my indicator painted a much more accurate picture of the business cycle.

There is a big difference between our indicators: ECRI’s Weekly Leading Index is a model calculated with a secret formula. My indicator is a straightforward presentation of the hardest of hard data: taxes withheld from the paychecks of American workers. The moral of the story is that when America’s payrolls are expanding, you don’t need to worry too much about the economy.

Mish Shedlock has a detailed criticism of ECRI here.

Apple?
On Wednesday night, I began my “XLF Goes Rogue” post by congratulating Steve Grasso, and then pointing out the XLF’s breakdown. Then, Thursday’s daytime episode of CNBC’s “Fast Money“, began by congratulating Grasso and went on to point out the problem with the XLF.

Do I hear an echo?

Grasso also said that his mutual-fund clients couldn’t get enough Apple stock. But maybe they did get enough, because two hours later (at 2:38pm) AAPL stepped into the elevator and pressed the “Hell” button. AAPL, and the rest of the market made what might have been the sharpest plunge of the month – and with strong volume too.

Melissa Lee opened the 5pm episode of “Fast Money” raving about how Apple continues to “defy gravity.” I reckon she didn’t look at the intra-day chart. They then discussed Apple for seven straight minutes without ever mentioning the afternoon plunge. There were some bearish opinions presented, but overall it came across as an infomercial for AAPL.

This all stinks of distribution. I wouldn’t buy Apple here with Larry Kudlow’s money.

New Channel in Town?

The futures are up a couple of points as I write this Thursday night, but they will need to do better to break out of their new downtrend channel (click chart to enlarge):

The blue lines on this 60-minute chart are drawn roughly around the September rally, which may be giving way to the new downtrend channel (red lines).

Block-Busted
I enjoyed seeing Blockbuster file for Chapter 11 bankruptcy. Before the internet, I dreaded going there. They had the worst customer service I have ever seen.

Volcker Goes Nuts
In what appears to be yet another sign of the wheels coming off of the Obama administration, Paul Volcker,

“…scrapped a prepared speech he had planned to deliver at the Federal Reserve Bank of Chicago on Thursday, and instead delivered a blistering, off-the-cuff critique leveled at nearly every corner of the financial system.”

WSJ story here. Here is my favorite quote:

“I’ve heard so many stories about how important derivatives are but there doesn’t seem to be much doubt that the creation of derivatives has far exceeded any pressing need for hedging.”

I’m sure that he’s talking about the banks’ giant CDS casino there.

Note: this was published at midnight, while the futures were still rallying. They didn’t roll over until 3am.

Congratulations to NYSE floor-trader Steve Grasso for defeating Doug Kass mano-a-mano last week. Kass was preaching doom, and Grasso was bullish when the SPX broke out to the upside.

However, Grasso said something on CNBC Wednesday that I’m not so sure about. He said that the market would likely be strong until the elections. But what about the financial sector? I mean, what’s the Tea Party’s policy toward banks? Answer: The “Santelli Treatment”: turn the bankers upside down, shake them until the TARP money falls out of their pockets, and then drop them on their heads. No more Bailout Nation, right?

Maybe that’s the right thing to do in the long run, but the Tea Party might be expected to cause a bit of a tumult while they are getting the poison out, don’t you think? If you want to make a fiscally-responsible omelette, you have to break a few eggs; maybe even do something drastic like shut down the banks’ CDS casino. Who knows?

On Monday night, I pointed out that the XLF, IWM, and IYT were not validating the SPX’s breakout, and they still aren’t. The IWM and IYT pierced their August peaks, but were unable to close above them. Bulls should be worried about that. And bears should be worried that IWM and IYT are still within easy striking distance of getting it done.

But financials were the worst sector on Wednesday with the XLF down 1.56%. In fact, when it comes to the XLF, you can forget about a breakout and start worrying about a breakdown. On the chart below, I have drawn a red box to show last week’s trading range. Notice how the XLF made a false breakout, and has now broken down out of the range (click chart to enlarge):

The SPX can’t get far without the financials, so bulls should keep their fingers off of the buy trigger until the XLF gets with the program – assuming the parabolic program has not been canceled already.